Many foreigners misuse their social visit passes and stay on in Malaysia to work illegally, including taking part in activities of vice.
In the past, Malaysia has said that thousands of Indian nationals had stayed back in the country long after the expiry of their visas.
Immigration department said according to records, nationals from China and India formed the largest number of visitors to Malaysia. Last year, 6.93 lakh tourists from India visited Malaysia.
Immigration Department head Alias Ahmad said the tracking system would use the foreigners' biometric data, which is recorded when they enter the country.
"We can detect their location based on the biometric data in our system. For example, when they open a bank account they would need to provide their fingerprint," he told mStar Online.
He said the tracking system would also detect foreigners who check into hotels using their passports.
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"This is why it should be compulsory for all foreign workers to open a bank account to receive their salary, while tourists should validate their passports upon checking into a hotel," he said as there will be a system linking it to the department to check for biometric data.
At the moment, the only way to detect foreigners who overstay is when they exit the country or during an enforcement raid.
Alias said the tracking system was a continuation of the Advanced Passenger Processing System (APPS), aimed at eradicating transnational crime such as human trafficking and drug smuggling.
"APPS does a background check on foreigners who enter Malaysia, including whether they have any criminal record," he said.
Alias added that there was currently no system to track the movements of foreigners beyond biometric checks at the country's entry points.
However, he said that it was too early to say when it would be implemented as the system was still in the planning stage.